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Prospects Weekly: Moderate inflation in some countries provides scope for policy easing, weak capital goods orders suggest that firms unwilling to commit to long-term investment

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Moderate inflation in some countries provides scope for policy easing to support growth if external conditions were to deteriorate; but policy options in others are constrained by high inflation. Weak capital goods orders in high income countries suggest that firms remain unwilling to commit to long-term investments amid US fiscal cliff and Euro Area risks. Grain markets remain tight after drought conditions this summer reduced maize and wheat harvests, but rice markets continue to be well supplied.

Were external conditions to deteriorate, some developing countries have room to support growth through policy easing, but others are constrained. Moderate inflation rates or rates well within central bank targets in China, Malaysia, Indonesia (EAP), Chile and Colombia (LAC), Armenia, Georgia, Romania, Kazakhstan (ECA), Kenya, Mozambique and Uganda (SSA), and Morocco (MENA) provide some space for policy easing through policy rate and reserve requirement cuts to support growth if external shocks materialize. In spite of recent downticks in food and fuel prices, inflation remains high in India and Turkey and above the targeted rates in Mexico, Peru and Russia. This implies that these economies would have less room to use monetary policy to offset an external shock should one arise. Space for countercyclical policies is further limited by a high fiscal deficit in India and a large current account deficit in Turkey.
Capital goods orders remain weak in high income countries signaling firms’ pessimism about future prospects. Despite strengthening housing and labor markets, strong retail sales and favorable developments in financial markets since July, capital spending in the United States has weakened further – with firms apparently remain unwilling to commit to invest amid looming “fiscal cliff” risks at the end of 2012. Capital spending in Germany is also falling, with continued Euro Area weakness (Euro Area GDP fell 0.1 percent (q/q) in Q3), adding to fiscal cliff related concerns and weak orders from trade partners. In Japan, the fall in investment spending is partly payback for the post-earthquake/tsunami boom in reconstruction spending, but also reflects significant weakening in export demand related to its territorial dispute with China. As these risks came to the fore after US elections, global equity markets lost $1 trillion in the following week. Perhaps reflecting weakening perspectives, sovereign credit default swap (CDS) spreads in both core and periphery countries in the Euro Area have edged up in recent weeks.


Maize and wheat markets remain tight, but rice markets are well supplied. Despite a marginal upward revision to the global grain supply outlook for the 2012/13 crop year, stock-to-use ratios (especially for maize) remain low by historical standards. Prices did not move much in response to the mildly positive update, confirming market concerns over low stocks. Grain production forecasts were cut sharply this summer due to severe drought conditions in the US (maize) and a heat wave in Eastern Europe and Central Asia (wheat). In developing countries, higher international prices are being reflected at the local level. By contrast, the rice market is well-supplied with sales expected to surpass a record 38 million tons in 2012. Real local grain prices (maize, rice, and wheat) are up compared with a year ago in 80% of countries reporting data. Several Sub-Saharan African and Latin American countries saw some of the sharpest increases.


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